May 2016 Newsletter

The Liberal government released its first Federal budget on March 22, 2016. Although some of the measures were previously proposed, many were new and some came as a surprise. The significant income tax measures and related proposals include the following:

Every individual who is resident in Canada has a capital gains exemption that exempts from taxation the capital gains from dispositions of certain types of property. Although the amount is often referred to as an “exemption”, it is actually structured as a deduction in computing your taxable income.

Two types of property are eligible for the capital gains exemption: shares in a qualified small business corporation (QSBC), and qualified farm or fishing property.

The lifetime limit for capital gains from QSBC shares is currently $824,176, or $412,088 for taxable capital gains since only half of capital gains are taxed (2016 amounts). This lifetime amount is indexed annually to account for inflation. The lifetime limit for capital gains from dispositions of qualified farm or fishing property is $1 million, which is not currently indexed but will be indexed in conjunction with the QSBC limit, once the latter limit hits $1 million. However, the two limits are not cumulative. In other words, every dollar of exemption used for QSBC shares reduces the amount available for farming or fishing property, and vice versa.

If you sell property, you are normally required to report the gain or profit in the year in which the proceeds of disposition become receivable. Therefore, you may be required to include the gain or profit in income in the year of disposition, even though you have not received all of the proceeds.

Fortunately, there are two reserves that apply in these circumstances. One is a capital gains reserve, which applies where the disposition of the property gives rise to a capital gain. The second is an inventory reserve, which applies where the disposition is made in the course of a business of selling the property.

Foreign rectification order not legally binding for canadian income tax purposes

In certain cases, taxpayers can apply to a provincial superior court for a rectification order in respect of their transactions. If granted, the order will retroactively change the contracts or transactions to reflect the parties’ intention if the relevant documents did not accurately reflect that intention. Rectification orders are normally sought where the parties intended a transaction to occur in a more tax-beneficial manner than that provided under the documentation that was actually signed.

Where the rectification order is granted by a Canadian court of proper jurisdiction, the CRA is obligated to abide by its terms and accept the income tax treatment that applies to the rectified transaction.